On the Oil Price-GDP Relationship

This article analyzes the macroeconomic impact of high oil prices on various national economies. Using an analytical model, we show that oil price-real gross domestic product (GDP) elasticity can be estimated roughly from current oil prices, GDP, and oil imports and exports. In contrast to large-scale modeling, our approach is based on simple algebra and clear assumptions, and thus provides policymakers with a more transparent view of the vulnerability of economies to oil price increases, in terms of GDP; our model shows how this vulnerability declined sharply in the late 1980s and remained low through the 1990s, and how the euro-zone countries are becoming more vulnerable while Japan remains less so.